Federal Reserve (Fed) Governor Michelle Bowman signaled a stronger tilt toward the pro-rate-cut camp on Friday, warning that the central bank risks falling further behind the curve. She pointed to recent downward payroll revisions as evidence the Fed may have underestimated the degree of labor market weakness, suggesting that policy easing could already be overdue.
Neutral rate pressures and structural drags
Bowman acknowledged that inflation remains above the Fed’s 2% target but argued structural forces—including slower population growth and an aging workforce—will act as long-term drags on the neutral rate of interest. She estimated the current neutral rate at around 3%, higher than pre-pandemic levels, but noted demographic trends will keep pulling it lower over time.
She cautioned that the Fed must retain independence from political pressures as it navigates rate policy, stressing the importance of forward-looking rather than backward-looking data assessment.
Key highlights from Bowman’s remarks
- Payroll revisions show Fed may be further behind the curve on cuts
- Neutral rate seen at 3%, higher than pre-pandemic but facing long-term structural drags
- Advocates proactive, forward-looking approach rather than reactive data dependence
- Supports a smaller balance sheet, tilted toward shorter-dated Treasuries only
- Calls for active balance sheet management to better detect market stress
- Prefers reserves closer to scarce than ample to encourage bank risk management
- Supports limiting emergency lending facilities to temporary, crisis-only measures
- Backs reform of the enhanced supplementary leverage ratio (eSLR) to reduce reliance on standing repo
- Labor market risks outweigh upside risks in inflation
- Sees gradual approach to rate changes as preferable
